Jamie Dimon, the
chief executive of JPMorgan, blamed "errors, sloppiness and
bad judgment" for the loss, which stemmed from a hedging
strategy that backfired.

The
trading in that hedge roiled markets a month ago, when
rumors started circulating of a JPMorgan trader in London
whose bets were so big that he was nicknamed "the London
Whale" and "Voldemort," after the
Harry Potter villain.

I’m still
not entirely clear on what the trades by Bruno Iksil, the
so-called "London Whale," were exactly. According to the
excellent Felix Salmon at Reuters, Iksil had taken a massive
long position on corporate CDS, and when word of this leaked
out, the market turned on him and beat his brains out. From
Salmon’s piece:

Whenever a trader has a large and known position, the market
is almost certain to move violently against that trader —
and that seems to be exactly what happened here. On the
conference call, when asked what he should have been
watching more closely, Dimon said “trading losses — and
newspapers”. It wasn’t a joke. Once your positions become
public knowledge, the market will smell blood.

If you’re
wondering why you should care if some idiot trader (who
apparently has been
making $100 million a year at Chase, a company that has been
the recipient of at least
$390 billion in emergency Fed loans) loses $2 billion for
Jamie Dimon, here’s why: because J.P. Morgan Chase is a
federally-insured depository institution that has been and will
continue to be the recipient of massive amounts of public
assistance. If the bank fails, someone will reach into your
pocket to pay for the cleanup. So when they gamble like drunken
sailors, it’s everyone’s problem.

Activity
like this is exactly what the Volcker rule, which effectively
banned risky proprietary trading by federally insured
institutions, was designed to prevent. It will be argued that
this trade was a technically a hedge, and therefore exempt from
the Volcker rule. Not only does that explanation sound fishy to
me (as Salmon notes, for Iksil’s trade to be a hedge, this would
mean Chase had an equally giant and insane short bet on against
corporate debt, which seems unlikely), but it's sort of
immaterial anyway: whether or not this bet technically violated
the Volcker rule, it definitely violated the spirit of the law.
Hedge or no hedge, we don’t want big, federally-insured,
too-big-to-fail banks making giant nuclear-powered derivatives
bets.

This
incident is certain to reignite the debate about Dodd-Frank and
may undermine the broad effort to roll back the bill, which
we wrote about in the latest issue of the magazine. Staffers
on the Hill started mobilizing the instant the Chase news hit
the airwaves yesterday, and you can bet we'll hear more debate
in the next few months about not only the Volcker Rule but the
Lincoln Rule, which was designed to wall off risky swaps from
the federally-insured side of these banks. I’ve heard from all
sides today, with some thinking the Chase trade was Dodd-Frank
compliant, and others saying it probably violated both the
Volcker and the Lincoln rules.

Either
way, the incident underscored the basic problem. If J.P. Morgan
Chase wants to act like a crazed cowboy hedge fund and make wild
exacta bets on the derivatives market, they should be welcome to
do so. But they shouldn’t get to do it with cheap cash from the
Fed’s discount window, and they shouldn’t get to do it with
money from the federally-insured bank accounts of teachers,
firemen and other such real people. It’s a simple concept: you
either get to be a bank, or you get to be a casino. But you
can’t be both. If we don’t have rules to enforce that concept,
we ought to get some.

Matt Taibbi is a contributing editor
for Rolling Stone. He’s the author of
five books, most recently The Great Derangement
and Griftopia, and a winner of the
National Magazine Award for commentary.